JERUSALEM, Aug 11 (Reuters) - Israel's interior minister has given final approval for a plan to build 1,600 settler homes in East Jerusalem, a project whose announcement last year during a visit by U.S. Vice President Joe Biden caused a diplomatic rift with Washington.

The official announcement Thursday of the go-ahead from Interior Minister Eli Yishai could weigh on U.S.-led efforts to dissuade the Palestinians from seeking United Nations endorsement of statehood in the absence of peace talks they suspended over Israeli settlement construction.

Nabil Abu Rdainah, spokesman for the Palestinian presidency, called on the United States, the European Union and other sponsors of the Middle East peace process to pressure the Israeli government to halt the settlement plans.

The United States said it was concerned by Israel's decision to continue building in East Jerusalem, saying this made it much harder to bring Israelis and Palestinians back to peace talks and undermined trust between the two sides.

However, it did not announce any concrete actions to try to prevent Israel for going ahead with the project.

Initial approval for the 1,600 housing units in Ramat Shlomo, a religious Jewish settlement in an area of the West Bank annexed to Jerusalem by Israel, was given in March 2010, casting a shadow on Biden's visit while highlighting U.S.-Israeli differences over such construction.

Biden condemned the Israeli plan at the time and U.S. Secretary of State Hillary Clinton, in unusually blunt remarks, called it an insult. Israeli Prime Minister Benjamin Netanyahu voiced regret for the timing of that announcement but rejected any curbs on settlement in and around Jerusalem.

We are concerned about continuing Israeli action with respect to housing construction in Jerusalem. We have raised these concerns with the Israeli government and we will continue to do so, U.S. State Department spokeswoman Victoria Nuland said in Washington, saying she could not say whether the United States had raised the matter since the final approval or whether it was contemplating any new measures toward Israel.

Unilateral action of this kind works against our efforts to get folks back to the table. It makes it all more difficult, Nuland told reporters at her daily briefing. It undercuts trust.

Israelis and Palestinians briefly resumed direct peace talks last September but these unraveled within weeks in a dispute over settlement construction, leaving U.S. President Barack Obama's hope for an outline peace deal within a year in tatters.

Palestinians want East Jerusalem as capital of the state they hope to found in the West Bank and Gaza Strip, which Israel occupied in the 1967 Middle East war. Israel deems all of Jerusalem its capital -- a status not recognized abroad. Israel quit Gaza in 2005 but disputes Palestinian claim on all of the West Bank.

Israel has said building would not begin for several years and a housing ministry spokesman gave no timeline for the project's implementation, saying there were significant planning procedures still pending.

The country is currently gripped by escalating protests for cheaper housing, raising speculation that some settlement projects could be sped up.

Peace Now, an anti-settlement Israeli advocacy group, responded to Yishai's move by issuing a statement accusing the government of cynically using the current housing crisis in Israel to promote construction in the settlements.

Some 500,000 Jews live in the West Bank and East Jerusalem, areas captured by Israel in a 1967 war. There are about 2.5 million Palestinians in the same territory. (Additional reporting by Arshad Mohammed; Writing by Jeffrey Heller, Editing by Sitaraman Shankar and Anthony Boadle)